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Calculate the fair value of the leased machine at july

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Reference no: EM132962528

Stella Ltd manufactures specialised machinery for both sale and lease. On 1 July 2020, Stella Ltd leased one of these machines to Josh Ltd, incurring $3,000 in costs to prepare and execute the lease document. Josh Ltd incurred $2,000 in costs to negotiate the agreement. The machine being leased cost Stella Ltd $65,000 to manufacture. The machine is expected to have an economic life of 5 years, after which time it will have a residual value of $1,000.

The terms of the finance lease are as follows.

Lease terms                                                         3 years
Annual payments (1st payment due on 1 July 2020)      $28,000
Estimated residual value at the end of the lease term      $6,000
Residual value guaranteed by Josh Ltd                             $4,000
Interest rate implicit in the lease                                         6%

All insurance and maintenance costs are paid by Stella Ltd and amount to $4,000 per year and will be reimbursed by Josh Ltd by being included in the annual lease payment of $28,000. The machine will be depreciated on a straight-line basis. It is expected that Josh Ltd will return the machine to Stella Ltd at the end of the lease.

Required

Problem 1) Prepare the lease payment schedule for Josh Ltd.

Problem 2) Prepare the journal entries to account for the lease in the books of Josh Ltd for the year ended 30 June 2021. Narrations are required.

Problem 3) Calculate the fair value of the leased machine at 1 July 2020.

Reference no: EM132962528

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